Tag Archives: fiscal policy

Summary: It’s time to prepare for a possible recession in 2016. The manufacturing slump continues to deepen. A toxic combo: high inventories in November and weak retail sales in December. In February this expansion will tie for the 3rd longest expansion. {2nd of 2 posts today.}

The Atlanta Fed’s GDPnow model just lowered its est for Q4 real GDP from +0.8% to +0.6%. It is not better than carbon-based economists, but provides a different perspective. The *average* revision of real GDP is 1.2% from the advance announcement (coming Jan 20) to the final. The standard deviation is 1.0 — so a 2.4% revision is commonplace (roughly once every five years). Q4 real GDP could easily be red. We might already be in a recession.

Many people believe that the “government is out of bullets” to fight the next recession. We can take reassurance in the fact that they are wrong, and that the government has powerful tools to fight the next recession. We are not back in the horrific late 19th century, with its frequent and deep recessions — and no government counter-cyclical action.

Summary: In a previous article I listed the powerful tools the US government would deploy during the next recession. Today we discuss something more important: will they work? We can look to Japan for an answer. Their great stagnation began with the 1989 crash, 11 years before the tech bubble burst and began America’s new era. Japan took fiscal and monetary policy to the outer limits. Now it’s in a recession. Although our circumstances differ, we’re following in their tracks.

“Keiki Kaifuku, Kono Michi Shika Nai” (“Economic Recovery,
There Is No Road But This”).
— LDP Campaign Slogan, December 2014. If only this were true.

Summary: Six years after the recession ended, we are due for another recession. Many experts say that the government is “out of bullets” to fight the next severe downturn. That’s quite false because 2008 marked the start of a new era in which our leaders manage the business cycles using strange and awesome tools. We’ll learn the long-term effects of these tools slowly, probably only decades later. {2nd of 2 posts today.}

“All is not lost until you run out of airspeed, altitude, and ideas.”
— Pilots’ wisdom.

Roger Bart and Shuler Hensley (on table) in the musical “Young Frankenstein” at the Hilton Theater.

(1) Expect the next recession

Free market economic systems produce greater growth than any other system yet tried. Business cycles — and recessions — are a price we pay for the growth. They’re unpredictable — literally so (the consensus of economists has never predicted one). They can destroy years of growth, and change the course of nations. The 2008 crash did both, as shown by this slide from a typically excellent analysis by Brad DeLong.

Summary: What will America look like in in 2025, after another decade of our long war? In the second of this series William Lind describes two scenarios, failed and successful responses to risks regarded as likely among paleoconservatives. Seeing visions of the future like this can help you decide how to vote in November 2016. Perhaps the fears of each group are what most clearly distinguishes Left and Right in America.

Our future as two sides of the coin
By William S. Lind

The first toss of the coin: a dark vision

America’s “long war” continues to prove Sun Tzu correct: no nation ever benefits from a long war. From Afghanistan through Iraq to war with Iran (following Congress’s rejection of President Obama’s deal with Iran, which led to Iran building an atomic bomb, which led to an American attack), in Syria, and now in Saudi Arabia, America has failed to attain closure while spending itself into ruin. As I write in this year of 2025, the Federal debt is six times the GNP, revenues cover only 23% of federal expenditures, and it takes 25,000 dollars to buy one yuan {currency of China, now worth $0.16}. Almost half of the federal budget goes to paying interest on the debt. It is rumored the Estates General will soon be called, in the form of a Constitutional Convention.

In Washington, since the explosion of a suitcase nuke in Seattle on 25 December 2024, both political parties agree we must continue to fight. Although al Qaeda claimed credit for the Seattle bombing, American intelligence traced the origin of the plot to Saudi Arabia. This was no surprise; everyone had known for decades that most Sunni extremism had its roots in Saudi money. Previously, the United States had to pretend otherwise because of its dependence on Saudi oil. Now, with imported oil unaffordable, that was irrelevant.

The Saudi war is following the usual course. The initial American invasion, with three divisions, quickly captured Riyadh and destroyed the Saudi state. Fourth Generation war goes on in all the populated parts of Saudi Arabia — even the Shiites are fighting us, at the same time they fight the Sunnis — and jihadi volunteers pour in to defend Mecca and Medina, both of which U.S. troops occupied at the demand of our military commanders, who said they were being used as safe havens.

American air, drone and missile strikes hit daily throughout the Islamic Middle East and Southwest Asia. None of what we do appears to make any difference. Washington’s policy remains one of serial failure: when what we do fails in one venue, we go on to do the same thing somewhere else. Only complete financial ruin, which is rapidly approaching, appears likely to change anything.

Summary: The economic data continues to darken. Let’s review the situation — updating the recession watch — and guessing what might be the government’s response to a recession. It’s an era of new normals, so we should expect steps that would have been considered incredible or even mad a decade or two ago. {1st of 2 posts today.}

“Toto, I’ve a feeling we’re not in Kansas any more. We must be over the rainbow!”
— Dorothy in “The Wizard of Oz”.

Contents

The bad news

Worse news

The weak data

What comes next?

For More Information

Perhaps a better world lies ahead

(1) The bad news

The graph below gives an ugly forecast. But let’s keep this in context, especially now that the doomsters have discovered it. The value of the Atlanta Fed’s GDPnow forecast is its immediacy. They explain that it’s no more accurate than forecasts by economists or other models. Which is to say it’s a best guess made with limited information. Also, the Fed remains hopeful that Q1 is an aberration, so that 2015 has growth of 2.3% – 2.7%.

Summary: Beam us down to Earth on 31 December 2015. What will we find? My guess is that the massive experiments now underway by experts will have borne fruit, and we’ll know if they were sweet or poisoned. Interesting times lie ahead, and none can say how they will end.

Contents

The age of experts’ experiments on us

Warnings of Climate Change

Economics: monetary and fiscal magic

For More Information

Photo from the Star Trek episode “Miri” – The landing party arrives in response to a distress call. Experts on the planet have run a massive experiment to produce a better world. Looks like it didn’t end well.

(1) The age of experts’ experiments on us

The 21st century has seen some of the largest experiments ever by experts, different from the often-mad amateur experiments that shaped so much of human history (e.g., the French and Russian revolutions, the Fascist social “engineers” in the 1930s, the 1970s Khmer Rouge in Cambodia). Some have run to completion, such as the US military’s expeditions to Iraq and Afghanistan — using the techniques of COIN to defeat local insurgents and build new western-style nations (quite mad given the history of almost total failure since WWII by foreign armies fighting insurgents). Other and larger experiments continue running. Let’s look at two of the biggest.

Summary: A weakness of my posts is that they don’t adequately convey the wonders of our time, the extraordinary events, the uncertainty of future outcomes. Today I attempt to show the amazing nature of our new economy, as highlighted in last weeks’ speech by Larry Summers. We have entered a new world, for ill or better.

Olivier Blanchard is Director of Research at the IMF and a Professor of Economics at MIT. He goes to the heart of our situation in this title: “Monetary Policy Will Never Be the Same“, 19 November 2013 — “In short, monetary policy will never be the same after the crisis. The {IMF Economic Forum} helped us understand how it had moved, and where we have to focus our research and policy efforts in the future.”

We should listen to Blanchard. The response of the major nations to the crisis took us into a new world. Step by step monetary policies have grown bigger and stronger (in several dimensions), beyond anything previously seen in peacetime There are few signs of the world returning to normal soon.

But Blanchard’s statement is true in another way. Larry Summers’ speech opens a new perspective on our situation. The conventional view of the US is an economy in an unusually long but very slow expansion, responding to intense fiscal and monetary stimulus. Summers instead suggests that the US has fallen into the same hole as Japan did in 1989. Perhaps the entire developed world has.

More specifically, we might be in a world of secular stagnation. That the real return on capital might have dropped to zero — or gone negative. As Japan has shown, in this hole even low levels of real interest rates fail to spur investment. Monetary stimulus only blows bubbles. This condition can continue for years, until the real return on capital returns to more normal levels.

The standard Keynesian solution is — as I and so many others have advocated for so long — fiscal stimulus. Borrow at low rates to rebuild our decaying infrastructure, and do other things with a positive return to society. This helps to return the economy more quickly to a good equilibrium. It would channel the excess liquidity created by monetary stimulus into the real world, instead of boosting asset prices.

The obvious solution remains unlikely due to dysfunctional political systems in the US and Europe (it’s being used in Japan, but a corrupt political establishment is in effect burning the money).